Wednesday, November 5, 2008

The American people-- through conditioning, habit and sloth --are consumers. We consume a variety of products to fulfill needs both real and (primarily) perceived. Marketers have discovered that through advertising we can be trained to decide which product to consume based on emotion rather than function. This includes political products, which are generally sold to us under the product category of "Politician". Please watch the series, "The Century of Self" which details how techniques of psychological manipulation have been used to sell us all manner of products, including the Politician.

Two dominant brands dominate the market for Politician products, the Republican and the Democrat. In the case of either brand product, intensive research goes into designing the product and its marketing to appeal to the emotional needs of the consumer. The product is not sold based on its functionality, since it has none other than to fulfill emotional desires and feelings.

Every aspect of the product is shaped to produce an effect. The smile, the tilt of the head, the gesture, the stance, the wave, the cadence and intonation of voice--all are consciously cultivated and crafted. As new market data becomes available, the product is updated to reflect the changes for maximum salability.

Barack Obama is a manufactured, packaged, marketed and sold product. If you voted for Barack Obama, you consumed the Democrat brand politician product "Obama". What is the function and purpose of the Obama product? What emotional need does it fulfill? To answer these questions, we must first identify the aims of the corporate manufacturers of the product.

At this point it's instructive to watch character Arthur Jensen's pivotal monologue in the film, "Network". Here, Jensen informs Howard Beale of the nature of the world--that the world is a business and that democracy is an illusion.

Jensen's argument is undeniable except to those who make a religious practice of denial. Those who are new to the fundamental truths of this world often experience outrage, as I did. Why outrage? Is it because we now see the injustice and tyranny of the System? Perhaps. Howard Beale was angered to madness by such revelations. But at a deeper level our anger proceeds from disillusionment because we once held the belief that government is good and beneficent and now find that belief shattered. It is not the specific facts of the System's brutality--the dead bodies, the ruined lives, the crushed dreams, the poisoned world--which truly enrages us. It is the fact that we were so duped as to believe that the System existed to protect against such outrages.

It's interesting to note that the path of the awakened and the ignorant are both ruled by emotions. In "The Matrix", Morpheus tells Neo, "You are a slave, Neo" and offers him a choice a a blue pill which will return him to blissful ignorance or a red pill which will reveal the truth.

It is the choice between one product or another. Neo chooses based on the emotional need fulfillment particular to himself. He chooses to know truth. The vast majority, however, will pay extra for the bliss of ignorance. The System and its product design teams know this and so provide products which correspond to this reality in order to maximize sales and profit for the corporation and maintain the stability of the System itself.

Since a certain number of Neo class consumers wanted a "Truth" product which represented Hope and real Change, the free market for political product (such as it exists through the temporary crucible of the internet) eventually met this need in the form of a quiet, thoughtful doctor from Texas by the name of Ron Paul. The Truth Seekers became evangelists and co-creators of the Ron Paul product, developing it together to fulfill real needs for constitutional, accountable government, freedom from oppression, the end to war, prosperity and Hope for America. Unfortunately, the Ron Paul product was not adopted by the greater part of the marketplace for politician products and so went the way of similar superior products, such as the electric car.

The System observed the spontaneous creation and development of the Ron Paul product and was at once intrigued and frightened. It saw that there was a deep emotional need in the market for a Change-like product which inspired Hope and yet strategically were challenged by the demand for a politician of true substance. Substance is very expensive and not profitable.

They set about the task of seizing control of this market for a Change and Hope politician. They quickly designed a product, the Obama, which gave the consumer much of the same emotional gratification as the Ron Paul product without any of the costs associated with actual substance. The corporate manufacturers of Politician products realized that most consumers will do anything to avoid taking the red pill of Truth which would cause them to see the Matrix for what it is--a system of enslavement. These consumers are Comfort Seekers rather than Truth Seekers. They could however be made to buy into a product which causes them to feel as though they had attained "Truth" while simultaneously denying reality. In George Orwell's "1984", this form of mind control is known as "doublethink".

Consumers of the "Obama" politician product are buying a sense that they have bucked the System by choosing a Change and Hope labeled product. Yet they are purchasing the emotional feeling associated with the product only. In a world of brutal realities, Barack Obama is 'Hope You Can Cling To".

Barack Obama is the pasteurized, processed food substitute of politics. He gives the appearance of being real, is easily consumable by large numbers, gives a sense of momentary gratification and makes consumers feel good about themselves. Obama is a new iPod. Or a shiny SUV. Or a Double Moccachino Latte. He is a vacation far away from the hard work of reality to Fantasy Island.

Obama is a convenience that buys the consumer four more years to slumber in doublethink denial that we live in anything other than a dictatorship of elite interests led by the international bankers who bankrolled the marketing of a phony Hope and Change product all the way to #1 market share.

Tonight, the American people have purchased a bill of goods. OK, America. You bought it. Now Obama will break it. How long will the denial last?

The Corrupt Origins of Central Banking in America

Central banking has been a corrupt, mercantilist scheme and an engine of corporate welfare from its very beginning in the late 18th century. The first central bank, the Bank of North America, was "driven through the Continental Congress by [congressman and financier] Robert Morris in the Spring of 1781," wrote Murray Rothbard in The Mystery of Banking (p. 191). The Philadelphia businessman Morris had been a defense contractor during the Revolutionary War who "siphoned off millions from the public treasury into contracts to his own … firm and to those of his associates." He was also "leader of the powerful Nationalist forces" in the new country.

The main objective of the Nationalists, who were also known as Federalists, was essentially to establish an American version of the British mercantilist system, the very system that the Revolution had been fought against. Indeed, it was this system that the ancestors of the Revolutionaries had fled from when they came to America. As Rothbard explained, their aim was

To reimpose in the new United States a system of mercantilism and big government similar to that in Great Britain, against which the colonists had rebelled. The object was to have a strong central government, particularly a strong president or king as chief executive, built up by high taxes and heavy public debt. The strong government was to impose high tariffs to subsidize domestic manufacturers, develop a big navy to open up and subsidize foreign markets for American exports, and launch a massive system of internal public works. In short, the United States was to have a British system without Great Britain. (p. 192)

An important part of the "Morris scheme," as Rothbard called it, was "to organize and head a central bank, to provide cheap credit and expanded money for himself and his allies. The … Bank of North America was deliberately modeled after the Bank of England." The Bank was given a monopoly privilege of its notes being receivable in all tax payments to state and federal government, and no other banks were permitted to operate in the country. It "graciously agreed to lend most of its newly created money to the federal government," wrote Rothbard, and "the hapless taxpayers would have to pay the Bank principal and interest."

Despite these monopolistic privileges, a lack of public confidence in the Bank's inflated notes led to their depreciation and the Bank was privatized by the end of 1783. But Morris did not give up on his scheme. He recruited a young Alexander Hamilton to serve more or less as his political puppet within the Washington administration. (Rothbard called Hamilton "Morris's youthful disciple.") In fact, the reason why Hamilton became Treasury secretary, despite having no reputation at all in the field of finance, was the recommendation by Morris to George Washington. (During the Revolutionary War, when he was an aide to Washington, Hamilton took the time to write Morris a 30-page letter proclaiming that he agreed with every one of his ideas about protectionist tariffs, corporate subsidies, and a government-run bank to finance them.)

Morris and his fellow Nationalists wanted a king-like chief executive who would rule over a mercantilist empire, just as the king of England ruled over his mercantilist empire. They, of course, would be the ones to advise and instruct the "king" and benefit financially from such an empire. So their young protégé Hamilton commenced his seven-year crusade to overthrow the first US constitution — the Articles of Confederation — by calling for a new constitutional convention to supposedly "revise" the Articles of Confederation. At the convention, Hamilton laid out his (really Morris's) plan: a permanent president who would appoint all the governors and who would have veto power over all state legislation. Under such a plan, state sovereignty would have been destroyed, and there would have been no escape from the central government's high taxes, protectionist tariffs, heavy debt, and foreign-policy imperialism — the agenda of the Nationalists.

The Hamilton/Morris plan was defeated, of course, as was the proposal made at the convention to include a central bank among the delegated powers to the federal government. But the government was more highly centralized, as "the Nationalist forces pushed through a new Constitution" and "were on their way to re-establishing the mercantilist and statist British model…" (p. 193). They begrudgingly acquiesced in a Bill of Rights in return for the anti-Federalists' support for the new Constitution. And most importantly, writes Rothbard,

A critical part of their program was put through in 1791 by their leader, Secretary of the Treasury, Alexander Hamilton, a disciple of Robert Morris. Hamilton put through Congress the First Bank of the…. United States…. modeled after the old Bank of North America [whose]….longtime president and former partner of Robert Morris, Thomas Willing of Philadelphia, was made president of the New Bank.

In making his case to President Washington for the constitutionality of a central bank, which had been explicitly rejected at the constitutional convention, Hamilton invented the idea of "implied powers" of the Constitution. These were "powers" that were not expressly delegated to the federal government in the document, but could be "implied" by clever lawyers like Hamilton. This of course became a roadmap for the total destruction of constitutional limitations on the powers of the federal government.

The First Bank of the United States "promptly fulfilled its inflationary potential," Rothbard writes in his History of Money and Banking in the United States (p. 69). It issued millions of dollars in paper money and demand deposits "pyramiding on top of $2 million in specie." The Bank invested heavily in the US government, and "The result of the outpouring of credit and paper money by the new Bank of the United States was … an increase [in prices] of 72 percent" from 1791–1796.

Northern merchants provided the main political support for Hamilton's Bank, whereas southern politicians like Jefferson supplied most of the opposition to it, seeing it as nothing more than a vehicle for financing an American version of the corrupt British mercantilist system, which would be destructive of liberty and prosperity. They were right, of course, and remain right to this day.

Sunday, November 2, 2008

The mainstream media and Wall Street have reached the consensus that the current credit crisis is the worst since the post-war period. George Soros’ statement that ”the world faces the worst finance crisis since WWII” epitomizes the collective wisdom. The crisis is currently the ultimate scapegoat for all the economic evils that currently plague the global financial system and the global economy – from collapsing stock markets of the world to food shortages in third world counties. We are repeatedly assured that the ultimate fault lies with the Credit Crisis itself; if there were no Credit Crisis, all of these terrible things would never have happened in the economy and the financial markets.

The most extraordinary thing is that the mainstream media has never attempted to compare the current economic environment to the one preceding the Great Depression. In essence, it is assumed outright that the Great Depression can never possibly happen again, ever, thus obviating the need for such a comparison. I actually believe that the macroeconomic fundamentals today are much worse, so that we are in for a protracted period of economic depression – a depression much worse than the Great Depression, a depression that would likely be remembered in history as “The Second Great Depression” or The Greater Depression, as Doug Casey has called it so aptly. Here is why I believe that this is the case.

Duplicating Mistakes from the Great Depression

At its core, the environment of the 1990s, and the response of the Fed to the tech-telecom bust has created an economic environment that has encouraged the repetition of the very same mistakes that led to the Great Depression. Here is a concise summary of widely recognized mistakes of the 1920s, without going into the details, with obvious parallels in the current environment:

Asset Bubbles – first in the stock market during the 1990s, then in real estate during the 2000s, pretty much mirroring the stock and real estate market bubbles of the 1920s.

Securitization – although not in the very “ultra-modernistic” form and shape of the 2000s, with slicing and dicing of pools and tranches of seniority, it was widely recognized in the 1930s that securitization during the 20s drove the domino effect in the U.S. financial system during the Great Depression.

Excessive Leverage – just like in 2008 the topic du jour is “deleveraging”, so the unwinding of leverage during the 1930s was the driver of forced liquidations and financial pain. Of course, it was very clear back then that the root of the problem was not deleveraging per se, but the excessive leverage that took place prior to the deleveraging process. “Investment Pools” were then instrumental in both the securitization and excessive leverage, just like the Hedge Funds of today.

Corrupt Gatekeepers – we know well that the Enrons and Worldcoms were aided and abetted by the accounting firms – those same firms that were supposedly the Gatekeepers of the financial community, yet handsomely profited from the boom while neglecting their watchdog functions. In the current financial crisis, we also know that the rating agencies were also making hay during the boom. Very similar were the issues during the 1920s that led to the establishment of the SEC and other regulatory bodies to replace the malfunctioning “gatekeepers” at the time.

Financial Engineering – we are led to believe that financial engineering is a rather recent phenomenon that flourished during the New Age Finance Era of the last 15 years, yet financial engineering was prevalent in the 1920s with very clear goals: (1) to evade restrictive regulations, (2) to increase leverage, and (3) to remove liabilities from the books, all too familiar to all of us today.

Lagging Regulations – just like the regulatory environment lagged the events of the 1920s and regulations were introduced only after the Great Depression had obliterated the U.S. financial system, so we are yet to see new regulations addressing the causes of the current crisis. Understandably, regulations should have foreseen today’s financial problems and should have been introduced before the crisis.

Market Ideology – back in the 1920s, just like in the last two decades, the market ideology of “laissez faire”, which Soros quite appropriately described as “Market Fundamentalism”, has swept the financial markets. Of course, the free market knows the best, but the reality is that the money market is not really free – when the Fed determines the cost of money (interest rates), and can fix this cost for as long as it wants, then all sorts of financial imbalances can be sustained without the discipline imposed by the market. This can lead to all sorts of problems that we actually have to face today.

Non-Transparency – back in the 1930s, it was widely recognized that businesses and especially financial institutions lacked transparency, which allowed for the accumulation of significant imbalances and abuses. Today, financial markets and institutions have intentionally compromised transparency in a number of ingenious, or better disingenuous, accounting trickeries and financial gimmicks, like off-balance-sheet entities (SIVs), hard-to-understand derivatives, and opaque instruments with mind-boggling complexity. Today CEOs and Chief Risk Officers of major financial institutions cannot figure out their own risk exposures. Originally, lack of transparency was designed to fool the markets; ironically, modern-day financial executives have gotten to the point of fooling themselves.

Worse than the Great Depression

So, why Worse Than The Great Depression? What makes me believe that the current depression will be worse than the Great Depression? I present six of the most important fundamentals that are “baked in the cake” and that suggest of a Greater Depression.

Overvalued Real Estate. The real estate market has been driven by a number of innovations in real estate finance. Overvaluation in real estate implies overvaluation in real estate financial instruments; an implosion of real estate prices implies an implosion in those instruments. It is widely recognized by economists that the Case-Shiller Index is a good proxy for the prices of real estate. A widely-recognized chart from 1890 to 2007 tells the story. The chart makes it crystal clear that the current overvaluation of real estate in real terms grossly exceeds the one during the 1920s. The coming correction in real estate will be protracted and gut-wrenching, with an expected cumulative effect that is much worse than the Great Depression.

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Total U.S. Credit. Credit makes leverage: the more credit in the financial system, the more leveraged it is. Today’s total U.S. credit relative to GDP has surpassed significantly the levels preceding the Great Depression. Back then, the total amount of credit in the financial system almost reached an astonishing 250% of GDP. Using the same metric today, the debt level in the U.S. financial system surpassed 350% in 2008, while the level in 1982 was “only” 130%. As Charles Dumas from Lombard Street Research put it quite aptly, "we've had a 30-year leveraging up of America, ending in an unchecked orgy."

The chart below shows a dramatic buildup of debt (leverage) in the 1920s and a deleveraging from 1930 to 1945 (or 1952). Then it shows a consistent buildup of debt afterwards, with a dramatic rise since the 1990s, and surpassing in 2000 the previous peak in 1929. The chart shows the level of 299% at the end of 2005, but the level has already reached 350% by 2008.

Of course, leveraging, as already indicated above, must necessarily be followed by deleveraging.

The best way to think about leverage is to compare it with using drugs, while deleveraging is like detox. The problem is not that the detox is killing the patient who has abused drugs for years; what is really killing the patient is the drug abuse itself. However, one thing is clear – the patient must either go through a painful detox or die; the same applies for the financial system – it must either deleverage or implode.

Explosion of Derivatives. Derivatives have been likened by Warren Buffet to “financial weapons of mass destruction”. The notional amount of total derivatives, as well as “Value at Risk” (VaR), has skyrocketed in recent years with the potential to destabilize the financial system for decades. To put it more allegorically, derivatives hang like a sword of Damocles over the financial system.

A comparison with the 1920s is difficult to make. mostly Derivatives back then were extensively used, although not widely understood. Given that I am not aware of any statistics of derivatives for the period of the 1920s, a meaningful comparison based on hard data is admittedly impossible. Nevertheless, I would venture to make an intelligent guess that the size of modern-day derivatives is hundreds or even thousands of times larger relative to the size of the economy in comparison to the 1920s. Some of the latest reports indicate that the total notional value of derivatives outstanding surpasses one quadrillion dollars. To put this into perspective, this amounts to almost 100 times the GDP of the U.S. economy.

The chart below shows the explosion of derivatives in the U.S. banking system. You can see that in 1991 the notional value of the derivatives was about the size of the U.S. GDP. By 2006 the size has grown to about 10 times the GDP, vastly outgrowing the real economy.

The chart below shows an even more telling picture. It shows world GDP and world’s notional value of derivatives. Again, while there is no direct comparison with the 1920s, it is clear that the overall level of derivatives has skyrocketed during the last two decades and presents risks that were simply not present at the onset of the Great Depression. The unwinding of these derivatives could only be compared with a nuclear explosion in the financial system.

Dow-Gold Ratio. The Dow-Gold ratio represents the most important ratio between the relative prices of financial assets and real assets. The Dow component represents the valuation of financial assets; the gold component – of real assets. When leverage in the financial system increases significantly, so does this ratio. A very high ratio is interpreted as an imbalance between financial and real assets – financial assets are grossly overvalued, while real assets are grossly undervalued. It also implies that a correction eventually will be necessary – either through deflation, which implies deleveraging and a collapsing stock market, or through inflation, which implies stagnant stock market for many years and steadily rising prices of real assets, commodities, and gold, usually associated with stagnant economy and typically resulting in stagflation. The first case—deflation—occurred during the 1930s, while the second case—stagflation—occurred during the 1970s.

The graph below illustrates the above concepts. The very high Dow-Gold Ratio in 1929 was followed by the Great Depression, while the higher level in 1966 was followed by the stagflationary 70s. It is evident from the chart the peak in 2000 surpassed the previous two peaks in 1929 and 1966, so this provides a reasonable expectation that the forthcoming return to “normalcy” will be more painful than the Great Depression, at least in terms of cumulative pain over the next 10-15 years.

Global Bubbles. It is impossible to make direct comparison with the 1920s, but today the global economy is rife with bubbles. Back then in the 1920s, the U.S. had its stock and real estate bubbles, while the European economies were struggling to rebuild from the devastations of WW1 that ended in 1919. I am personally not aware of any other bubbles during this period, although I welcome reader feedback on this topic.

Today the picture is very different. The U.S. economy had a stock market and real estate bubble that has surpassed its own during the 1920s. Colossal US current account deficits have fuelled extraordinary growth in global monetary reserves. As a result, Europe has real estate bubbles across the board, from the U.K. and Ireland, throughout the Mediterranean (Spain, France, Italy and Greece), to the entire Baltic region (Latvia, Lithuania, and Estonia) and the Balkans (Romaina and Bulgaria). Even worse, many Asian countries (China, Korea, etc.) also have their own stock and property bubbles, only with the exception of Japan, which is still in the process of recovering from its own during the 1980s. Thus, during the 1920s only the U.S. suffered from gross financial imbalances, while today the imbalances have engulfed the whole world – both developed and developing. It stands to reason that the unwinding of those global imbalances is likely to be more painful today than it was during the Great Depression due to both size and scope.

Collapsing Bretton Woods II. The global monetary system was on a quasi-gold standard during the 1920s. Back then dollars and pounds were convertible to gold, while all other currencies were convertible to dollars and pounds. An appropriate way to think about it is that of a precursor to the Bretton Woods from 1945-1971. What is important to understand is that while the system was fiat in nature, gold imposed significant limitations to credit expansion and leveraging.

Somewhat similar was the role of Bretton Woods that lasted from 1945 to 1971. The dollar was tied to gold, while all other fiat currencies were tied to the dollar. Just like the interwar period, gold imposed some limitations on credit and financial imbalances.

We now live in what has been termed Bretton Woods II. Essentially, this is a pure fiat dollar standard, where all currencies are convertible to dollars, either at fixed or floating exchange rates, while the dollar itself is convertible to “nothing”. Thus, the dollar has no limitations imposed to it by gold, so without the discipline of gold, the current global monetary system has accumulated significantly more imbalances than ever before in modern capitalism. These imbalances show up in the international monetary system as unsustainable trade deficits (and surpluses), skyrocketing official dollar reserves in some European and many Asian central banks, and the proliferation of Sovereign Wealth Funds; more generally, these imbalances result in a myriad of bubbles, overleveraging, and other maladjustments already discussed above.

Today Bretton Woods II is in the process of disintegration. The world is slowly but steadily losing its confidence in the dollar as the world reserve currency. A flight from the dollar is in progress and the collapse of the global monetary system is imminent. As Bretton Woods II disintegrates and a new system replaces it, the process of readjustment will be necessarily more painful than the respective process during the Great Depression.

A caution on terminology is necessary here. While the literature over the last 10-20 years has widely recognized the term “Bretton Woods II”, in September-October of 2008 the term was widely used by the media to describe a proposed international summit with the goal of reconstructing a new international monetary system designed from scratch, just like “Bretton Woods”. Instantly dubbed by the media “Bretton Woods II”, this term could be potentially very confusing as it could mean very different things to different people. The interested reader should consult Wikipedia’s Bretton Woods II where both meanings are explained in detail.

Conclusion

Since August of 2007 we have witnessed the relentless escalation of the credit crisis: a steady constriction of credit markets, starting with subprime mortgage-backed securities, spreading to commercial paper, then to interbank credit, and then to CDOs, CLOs, jumbo mortgages, home equity lines of credit, LBOs and private equity markets, and then generally to the bond and securities markets.

While the media describes the problem as one of illiquidity and confidence, a more serious analysis indicates that boom-time credit has been employed unproductively and so losses must be incurred. In other words, scarce capital has been misallocated, poorly invested, and effectively wasted. No amount of monetary or fiscal policy can fix the errors of the past, just like no modern treatment can quickly restore to health a drug addict debilitated from a decade-long drug abuse.

Based on indicators like (1) global real estate overvaluation, (2) indebtedness, (3) leverage, (4) outstanding derivatives, (5) global bubbles, and (6) the precariousness of the global monetary system, I would argue that the accumulated imbalances in the current period surpass significantly those preceding the Great Depression. I therefore conclude that the coming U.S. (and possibly) global depression will be of greater magnitude than the Great Depression of the 1930s. It likely suggests that we are entering a historic period that will likely be known as The Greater Depression.

Investor beware! Only gold can protect you from the ravages of another Depression!

IMF may need to "print money" as crisis spreads

The International Monetary Fund may soon lack the money to bail out an ever growing list of countries crumbling across Eastern Europe, Latin America, Africa, and parts of Asia, raising concerns that it will have to tap taxpayers in Western countries for a capital infusion or resort to the nuclear option of printing its own money.

The Fund is already close to committing a quarter of its $200bn (£130bn) reserve chest, with a loans to Iceland ($2bn), Ukraine ($16.5bn), and talks underway with Pakistan ($14.5bn), Hungary ($10bn), as well as Belarus and Serbia.

Neil Schering, emerging market strategist at Capital Economics, said the IMF's work in the great arc of countries from the Baltic states to Turkey is only just beginning.

"When you tot up the countries across the region with external funding needs, you get to $500bn or $600bn very quickly, and that blows the IMF out of the water. The Fund may soon have to start calling on the West for additional funds," he said.

Brad Setser, an expert on capital flows at the Council for Foreign Relations, said Russia, Mexico, Brazil and India have together spent $75bn of their reserves defending their currencies this month, and South Korea is grappling with a serious banking crisis.

"Right now the IMF is too small to meet the foreign currency liquidity needs of the larger emerging economies. We're in a dangerous situation and there is the risk of extreme moves in the markets, as we have seen with the Brazilian real. I hope policy-makers understand how serious this is," he said.

The IMF, led by Dominique Strauss-Kahn, has the power to raise money on the capital markets by issuing `AAA' bonds under its own name. It has never resorted to this option, preferring to tap members states for deposits.

The nuclear option is to print money by issuing Special Drawing Rights, in effect acting as if it were the world's central bank. This was done briefly after the fall of the Soviet Union but has never been used as systematic tool of policy to head off a global financial crisis.

"The IMF can in theory create liquidity like a central bank," said an informed source. "There are a lot of ideas kicking around."

For now, Eastern Europe is the epicentre of the crisis. Lars Christensen, a strategist at Danske Bank, said the lighting speed and size of Ukraine's bail-out suggest the IMF is worried about the geo-strategic risk in the Black Sea region, as well as the imminent risk a financial pandemic. "The IMF clearly fears a domino effect in Eastern Europe where a collapse in one country automatically leads to a collapse in another," he said.

Mr Christensen said investor sentiment towards the region has reached the point of revulsion. The Budapest bourse plunged 10pc yesterday despite the proximity of an IMF deal Meanwhile, Standard & Poor's issued a blitz of fresh warnings, downgrading Romania's debt to junk status, and axing the ratings Poland, Latvia, Lithuania, and Croatia.

The agency said Romania was "vulnerable to a sudden-stop scenario where capital inflows dry up or even reverese", leaving the country unable to cover a current account deficit of 14pc of GDP.

Romania's central bank has taken drastic steps to defend the leu, squeezing liquidity so violently that overnight rates shot up to 900pc. But there are growing doubts whether this sort of shock therapy can obscure the fact that economic booms are now turning to bust across the region.

Merrill Lynch has advised to clients to take "short" positions against the leu. "The fundamental picture suggests that Romania may face a currency crisis in the near term, similar to what Hungary has gone through over the last week," it said. The bank also warned that Turkey and the Philippines are vulnerable.

Hungary was forced to raise interest rates last week by 3 percentage points to 11.5pc to defend its currency peg in Europe's Exchange Rate Mechanism. Even Denmark has had to tighten by a half point, raising fears that every country on the fringes of the eurozone will have resort to a deflationary squeeze.

The root problem is that Eastern Europe and Russia have together borrowed $1,600bn from foreign banks in euros and dollars to fund their catch-up growth spurt over the last five years, according to data from the Bank for International Settlements. These loans are now coming due at an alarming pace. Even rock-solid companies are having trouble rolling over debts.

Mr Schering said Turkey was likely to join the queue for bail-outs very soon. "Their external liabilities have reached $186bn, and a lot of this is short-term debt that has to be rolled over in coming months," he said.

Turkey's prime minister Recep Tayyip Erdogan said over the weekend that his country would not "darken its future by bowing to the wishes of the IMF", but it is unclear how long Ankara can maintain its defiant stand as capital flight drains reserves.

Pakistan - now facing imminent bankruptcy - has also raised political hackles, balking at IMF demands for deep cuts in military spending as a condition for a standby loan. Diplomats say it is unlikely that the West will let the nuclear-armed Islamic state slip into chaos.

Back to Bretton WoodsEuropean leaders invoke historic conference to fix financial systemBy William L. Watts, MarketWatchLast update: 6:52 p.m. EDT Oct. 24, 2008LONDON (MarketWatch) -- Forget Davos. As world leaders attempt to pick up the pieces left by the most terrifying financial crisis since the Depression, it may be time for a New Hampshire mountain resort town to reclaim the spotlight.

French President Nicolas Sarkozy and British Prime Minister Gordon Brown have sounded calls for a revisit of the 1944 Bretton Woods conference that laid the groundwork for much of the postwar financial world order.

President Bush earlier this week acquiesced to calls by Sarkozy and European Union officials, setting a Nov. 15 summit of leaders from the Group of 20 leading industrial and developing nations to be held at the National Building Museum in Washington.

While they won't be meeting at the New Hampshire resort town that gave the Bretton Woods system its name, European leaders hope the gathering will get the ball rolling on a number of potentially major reforms.

"The U.S. really is the epicenter of the crisis, so the Europeans may think they're on the moral high ground and try to lead the process of reform," said economist Morris Goldstein, a senior fellow at the Peterson Institute for International Economics in Washington. "We'll have to see how this turns out."Sarkozy was the first to make a call for a new "Bretton Woods."

Last week, he told the European Parliament that the talks must aim to "overhaul capitalism," not by "questioning the idea of a market economy" but by implementing certain principles, including subjecting all financial institutions to regulation, ensuring bonuses don't provide incentives for undue risks and re-thinking the monetary system.

Not to be outdone, Brown, in an Oct. 17 op-ed in the Washington Post, also called for a "new Bretton Woods."

The same "sort of visionary internationalism is needed to resolve the crises and challenges of a different age. And the greatest of global challenges demands of us the boldest global cooperation," he wrote.

Brown declared the old postwar financial institutions "out of date" and in need of rebuilding to deal with a "wholly new era in which there is global, not national, competition and open, not closed economies." He reiterated calls for cross-border supervision of financial institutions, shared global accounting standards, "more responsible" executive pay and a role for international institutions to serve as an early-warning system.

The original Bretton WoodsConvinced that economic hardship had led to the rise of fascism, the Allies called the Bretton Woods conference in an attempt to address the causes of the Great Depression. The primary focus, economists say, was to come up with a currency system less rigid than the gold standard while providing similar stability. As part of the effort, the conference laid the foundations for the International Monetary Fund and the World Bank.

The resulting system remained in place until 1971, when the Nixon administration removed the dollar's peg to gold and allowed the greenback to float -- effectively putting an end to the fixed-rate system.

Some economists find references to Bretton Woods curious.

"Bretton Woods was about exchange-rate management and setting up facilities for country-to-country lending under duress, and that actually hasn't worked bad in this crisis," said Roger Kubarych, chief U.S. economist at UniCredit MIB and a senior fellow at the Council on Foreign Relations.

While some emerging economies, such as Iceland and Hungary, have seen runs on their currencies, "there's been no run on the dollar, there's been no run on the major currencies," he said. Chances of a major move back toward fixed exchange rates appear quite unlikely.

But Simon Derrick, chief currency strategist at Bank of New York Mellon in London, thinks the references to Bretton Woods may point, in part, to a desire to rein in recent volatility in foreign exchange markets.

Derrick also noted that European Central Bank President Jean-Claude Trichet warned in a news conference following this month's meeting of Group of Seven finance ministers and central bankers that authorities viewed excess volatility as a problem, even though no mention of currencies was made in the G7's official communique."It does seem to me there's evidence to suggest that Europe's very much focused on this idea of the need for perhaps a rather more controlled currency regime than currently is the case," he said.

That doesn't mean a return to a fixed-rate regime, he said. But authorities could make the case for a move back towards more active intervention in currency markets to rein in volatility, a feature of markets well into the 1990s.

After all, the British pound has seen a record daily drops against the U.S. dollar this week and other currency pairs are also showing huge swings.

Extreme volatility "clearly has the potential to do a huge amount of damage to investors, to people who aren't properly hedged, to people who are trying to forecast budgets. That extreme volatility contains the threat of feeding back into ... asset markets," he said.

No one-day fixRegardless, leaders aren't likely to come out of the one-day affair with anything resembling a broad plan to overhaul the world financial system. While the summit may get the ball rolling, there are a lot of very complex details that need to be ironed out. Leaders may schedule more meetings, but the nuts and bolts of any structural overhaul will be ironed out by technocrats, not presidents and prime ministers, experts said.

Moreover, the Nov. 15 conference comes shortly after the U.S. presidential election, leaving the Bush administration little leeway for serious negotiations. The White House has said it will seek "input" from the president-elect.

"I'm not sure I expect a lot out of this first meeting. I expect mostly principles and expressions of determination and cooperation," Goldstein said.

"Not all bad, I think - and much better also that they do it at the G-20 level than the G-8 level because the emerging economies have a big stake in the crisis."

The Group of Seven industrialized nations failed to halt the yen's advanceto near a 13-year high against the dollar after expressing concern about thecurrency's ``excessive volatility.''

The G-7 made an unscheduled statement after a request from Japan, FinanceMinister Shoichi Nakagawa said in Tokyo today, adding that his governmentwas ready to act if needed. The G-7 fell short of pledging concerted actionto halt the yen's gain.

Asian stocks tumbled for a fourth day, led by the Philippines, on concerngovernment measures will fail to support growth and prevent more emergingmarket economies from seeking bailouts from the International Monetary Fund.

Emboldened by the U.S. pursuit of a European-style bailout, Sarkozy haspacked his wish list for an upcoming international summit with calls foreverything from stiffer bank supervision and limits on executive pay tostate aid for hand-picked industries. While the moment is in his favor,history is working against him: throughout the postwar era, French attemptsto subdue globalization and come up with an exportable economic model havemisfired.

Asian and European leaders called for an overhaul of World War II-erabanking rules, lending support to French President Nicolas Sarkozy as hepushes the U.S. to embrace greater supervision of global financial markets.

The International Monetary Fund reached agreement with Ukraine on a $16.5billion loan to help support the nation's financial system as turmoil inglobal credit markets and recession concerns sweep eastern Europe.

Saturday, October 25, 2008

Where will it end? In the name of "safety and security", the fascist---truly the essence of the the word is at play here--merger between Corporations and Government continues unabated and unopposed. The Financial Oligarchy is the government, the Government is the Financial Oligarchy. And the USA is no longer the country the Founders bequeathed to us!

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It is a foretaste of what may happen across the world as governments discover that tax revenue, and discover that the bond markets are unwilling to plug the gap. The G7 states are already acquiring an unhealthy taste for the arbitrary seizure of private property, I notice.

So, over $29bn of Argentine civic savings are to be used as a funding kitty for the populist antics of President Cristina Kirchner. This has been dressed up as an anti-corruption and efficiency move. Aren't they always?

Argentine sovereign debt was trading at 29 cents on the dollar today, pushing the yield to 25pc. Tempted?

Credit Default Swaps on Argentine bonds reached 2,900. Do we have a Latin Iceland on our hands, but with 100 times the population? Or several, Pakistan, Ukraine, Hungary? ...... Switzerland? Australia? Britain?

The funds being targeted are known as AFJPs or retirement accounts, but how long will it now be before Mrs Kirchner cracks down on the entire $97bn pool of private pensions? There are a lot of much-needed hard currency assets in those portfolios.

"A state takeover of pensions creates all kinds of doubts and throws into relief the extreme financing needs of the government next year," said Jorge Alberti, from ElAccionista.com

Needless to say, the Kirchner government (part II) is unable to raise any money on the global markets at a tolerable price.

Investors have already been burned by her stealth default on Argentina's index linked bonds. This was achieved by sacking the head of the statistics office and rigging the inflation data (by 20pc annually, or so.)

Frankly, I am a little surprised that Argentina's 2001 default - the biggest in history - was not a severe enough burning in itself for investors. But political risk seems to be a blind spot for some asset managers. And then there was the great agro-boom of 2005-2007 so all was forgiven, until commodities went into free-fall in May.

President Kirchner has been eyeing the pension pool for some time. Last year she pushed through new rules forcing them to invest more money inside the country - always a warning signal.

My fear is that governments in the US, Britain, and Europe will display similar reflexes. Indeed, they have already done so. The forced-feeding of banks with fresh capital - whether they want it or not - and the seizure of the Fannie/Freddie mortgage giants before they were in fact in trouble (in order to prevent a Chinese buying strike of US bonds and prevent a spike in US mortgage rates), shows that private property can be co-opted - or eliminated - with little due process if that is required to serve the collective welfare. This is a slippery slope. I hope Paulson, Darling, and Lagarde tread with great care. I do not expect Steinbruck to tread with any care.

The Merval index of stocks in Buenos Aires is down 12.6pc as I write. Telecom Argentina took it badly (-25pc), so did Grupo Financiero Galicia (-13pc) and Banco Frances (-20pc).

If you blinked, you might have thought you were watching a scene from the 2006 "Borat" movie: Mortgage executives gathered in a large room are caught off-guard by disturbances in the audience, making for moments of uncomfortable silence. ...Read the rest of the story

(10-22) 04:00 PDT Sacramento -- Gov. Arnold Schwarzenegger will likely call a special legislative sessionin November to solve California's ongoing budget woes caused by continuingeconomic challenges and deteriorating revenues, his spokesman saidTuesday. The move would mean the current group of lawmakers would convene eventhough dozens of them, facing term limits, will be leaving office Nov. 30,when the legislative session officially ends. "The sooner we take action, the more money we could save," said AaronMcLear, Schwarzenegger's spokesman. Schwarzenegger said Tuesday that the state may need a more immediatefiscal fix. "We don't want to wait until the new year to fix some of the problems thatwe can fix now," he said during a news conference in Southern Californiato announce a deal between the California State University system andSunEdison, a Maryland firm, to install solar panels on college campuses. The state's finances have been the biggest challenge for Schwarzeneggerand the Legislature this year. The housing market meltdown and thesluggish economy resulted in less property, corporate and sales taxes forstate coffers, causing a nearly $17 billion gap in the current fiscalyear's budget. The governor and lawmakers were able to agree on a budget deal to closethe gap, but only after a record-setting impasse that ended whenSchwarzenegger signed the spending plan on Sept. 23, 85 days late. But within weeks of the budget enactment, state officials warned that taxreceipts are coming in even lower than expected and that California'srevenue could be down by at least $3 billion. And with the more recentproblems on Wall Street and the crisis in worldwide credit markets, theGolden State's finances are not expected to improve anytime soon. In order for Schwarzenegger to call a special session, he would have tofirst define just how big the deficit is and propose solutions for thelawmakers to consider. McLear said the governor's finance staff is gathering data and believespertinent information would be ready well before Dec. 1. While lawmakers agreed on the need for a special session to tackle thestate's budget crisis, at least one questioned whether it's possible tohave one before the end of November. "To readjust the budget based on one quarter's results when we haven'teven seen Christmas, I'm not sure if we'll have enough information to knowwhat the scope of the problem is," said Sen. Denise Moreno Ducheny, D-SanDiego, chairwoman of the Senate Budget committee. Then there is the question of whether Congress will deliver a federaleconomic stimulus package either late this year or in early 2009, and howthat could potentially affect California's finances, Ducheny said. "I understand people's sense of urgency, but we shouldn't be doingsomething for the sake of doing something without all of the facts," shesaid. Also, if lawmakers can't agree on solutions by the end of November,the session simply expires and the governor would have to call a new onewith a new class of lawmakers, Ducheny said. But Schwarzenegger argued Tuesday that there are things he and theLegislature can tackle quickly, such as new legislation to help homeownersfacing foreclosure keep their homes and immediately dispensing billions ofdollars of voter-approved bond funds for infrastructure projects. "And I think a special session will be a great tool to getting thosethings done," he said.

Your belief in gold as money and gold as an investment in times of economic crisis is about to be severely tested. Gold will soon collapse from $750 to $600 in a short span of time. This is both somewhat normal action within a bull market and also a result of extreme market manipulation by the money masters who rule our world.

This phase is know as “capitulation”. Many former believers in the gold bull will throw in the towel as gold breaks down beneath its most recent low around $740.00 per ounce. They will come to the conclusion that they were wrong about gold and will take their profits or losses and cash out. They will rush down to their local coin and bullion dealer and see what they can get for their stash. I wouldn't recommend being one of them.

Although gold coins and bullion are actually scarce and difficult to obtain in the real world at this time, the electronic market (known as COMEX) is highly manipulated. It is not a free market. Therefore the deep pockets can sell short the gold market electronically to drive the price down. Their goal is to drive all gold holders out of the market and scoop up all the physical gold for themselves. When gold does bottom in the $600-550 zone sometime in the next month, most holders of gold will have sold out, clearing the decks for a rapid reversal. The resulting surge will happen so fast that most will not react fast enough to get back on the bull and will be left holding rapidly depreciating dollars as the hyperinflationary stage sets in.

This is a brief characterization of the situation and not an in depth exploration of the many forces that are producing this situation. Would that I had the time to explain this in detail. But here are a few charts which will illustrate my point if you are adept at interpreting them.

Could I be wrong? Sure. Gold COULD bottom right here and rebound sharply, particularly since the US dollar is due for a major selloff, which would be bullish for gold. However, the damage to the gold bull market is real and in general markets under these conditions need a full clearing of the decks and a total shaking out of the weak hands for the bull to resume its uptrend.

Like water rushing over a river's banks, the U.S. government's rapidly mounting expenses are overwhelming the federal budget and increasing an already swollen deficit.

The bank bailout, in the latest big outlay, could cost $250 billion in just the next few weeks, and a newly proposed stimulus package would have $150 billion or more flowing from Washington before the next president takes office in January.

Adding to the damage is that tax revenues fall as the economy weakens; this is likely just as the government needs hundreds of billions of dollars to repair the financial system. The nation's wars are growing more costly, as fighting spreads in Afghanistan. And a declining economy swells outlays for unemployment insurance, food stamps and other federal aid.

But the extra spending, a sore point in normal times, has been widely accepted on both sides of the political aisle as necessary to salvage the banking system and avert another Great Depression.

"Right now would not be the time to balance the budget," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan Washington group that normally pushes the opposite message.

Confronted with a hugely expensive economic crisis, Democratic and Republican lawmakers alike have elected to pay the bill mainly by borrowing money rather than cutting spending or raising taxes. But while the borrowing is relatively inexpensive for the government in a weak economy, the cost will become a bigger burden as growth returns and interest rates rise.